Are Buy to Let Mortgages More Expensive?
Estimated reading time 6 minutes
A buy to let mortgage is used by landlords who want to buy property in order to rent it out, rather than live in it. They are usually interest-only mortgages, meaning that monthly repayments will only pay off the interest and not the amount owed on the mortgage, and therefore interest rates tend to be higher on average.
A buy to let landlord is someone who purchases properties and then rents them out to tenants, charging them a monthly rent, which should cover the mortgage, leaving some profit over.
Why are buy to let mortgages more expensive?
Buy to let mortgages are usually more expensive than standard residential mortgages. Not only do you have to pay a bigger deposit for a buy to let mortgage you also are likely have to pay a higher rate of interest because a buy to let mortgage is viewed by the lender as a riskier loan. This will make your monthly repayments more expensive than the same product on a residential mortgage.
When buying a property with the intention of renting it out, lenders see you as more of a risk as a borrower. Not only do they have to take into account that the property may be unlet for a period of time but also, they will have no knowledge regarding the tenant’s financial position. This therefore means that the lender has no way of knowing whether the tenant can be trusted to make their rent payments. Most buy to let lenders rely on the income from the letting to cover the mortgage, so if a tenant is struggling to pay their rent, there is a chain reaction affecting the ability to make the monthly mortgage repayments.
The higher risk then reflects on the interest rate that is offered and the amount which can be borrowed. The average pattern is that the interest rates (APR) are higher on buy to let mortgages than regular residential mortgages. It is usually around 1% and 3% more expensive. Furthermore, buy to let mortgages also require a higher deposit (around 25%) and higher arrangement fees.
Are buy to let mortgages interest only?
The majority of buy to let mortgages are interest only mortgage because in so much as the only thing being paid back is the interest, meaning you don’t pay back the amount borrowed for the mortgage. This makes monthly repayments lower and therefore the profit margins received for the rent higher than if the mortgage was on a repayment plan. The rental income covers the monthly interest; therefore, most landlords see buy to let mortgages as long-term investments that accumulate wealth over an extended period of time since historically property prices tend to increase over time.
Who can get a buy to let mortgage?
There are a few factors which impact your ability to get a buy to let mortgage.
1. Rental income focus
Unlike standard residential mortgages, buy-to-let mortgages place a primary emphasis on the rental income your property can generate. Your eligibility depends on whether the anticipated rental income can comfortably cover at least 125% of your mortgage payment. This safeguard ensures that your repayments, as well as other associated expenses, remain within your means.
2. Deposit considerations
It’s crucial to be mindful of the deposit requirement for buy-to-let mortgages as the initial deposit is typically larger than what’s expected for residential mortgages. While a deposit of 20% to 25% is standard, some lenders might demand 30% or more. Additionally, loan-to-value (LTV) ratios are frequently capped at 80% or less, with some prominent lenders even limiting it to just 70% LTV. For more information on this check out landlord guide titled How much deposit do you ned for a buy to let?
3. Age and mortgage eligibility
Your age can impact your eligibility for a buy-to-let mortgage. As you approach retirement, your options may become somewhat constrained. Nevertheless, there are lenders who, especially if you’re an experienced landlord with a conservative loan-to-value (LTV) ratio, won’t specify a maximum age limit.
4. Personal income assessment
In addition to rental income, your personal income may be scrutinized during the credit assessment, including any tax liabilities. The specific income requirements can vary, with some cases having no minimum income requirement, while others do.
5. Portfolio size matters
Lenders adopt diverse policies regarding the size of property portfolios. Some impose strict limits on the number of properties or their collective value, while others cater exclusively to landlords with extensive portfolios. For an in-depth exploration of this topic, refer to our comprehensive guide on the maximum number of buy-to-let mortgages you can hold.
6. Property type and eligibility
The type of property you intend to purchase can significantly influence your eligibility. Certain lenders only finance standard properties and may exclude non-standard construction types. Special restrictions may apply to houses of multiple occupation (HMOs) and other unconventional letting arrangements, contingent on the lender’s specific guidelines.
7. Property value considerations
It’s essential to factor in the value of the property you’re eyeing, as lenders may have set minimum and maximum loan-to-value thresholds.
1. Personal guarantees
In some cases, particularly when the loan-to-value ratio exceeds 50%, lenders may request personal guarantees, often from company directors.
8. Licensing and regulations
Buy-to-let properties may be subject to location-based regulations and licensing requirements. Complying with these regulations is vital to ensure a smooth and successful buy-to-let property investment.
Benefits of buy to let investments
Buy to let mortgages are popular among landlords and hold multiple positive aspects.
- Demand for rental properties is high, as renting is popular especially in more urban areas.
- The rental market is currently very strong and therefore renting out properties is relatively popular and easy during recent times.
- Renting out properties is a good method to generate income, since your tenants will be paying your mortgage for you, and there should also be extra income leftover each month.
- Property is known to be a relatively safe long-term investment, as the general pattern is that over time the value of your property should increase and provide you with a profit when you decide to sell it.
If you are thinking of exiting the property market, selling a buy-to-let or want to sell a property portfolio Gaffsy can provide you with a free cash offer. We buy any home regardless of location or condition, even those with tenants in situ. Our team is on hand to give you a valuation, contact us today.